Using Corporate Incubators and Accelerators To Drive Disruptive Innovation

Introduction

Corporations are establishing incubators, e.g., Samsung, and accelerators, e.g., Orange, in order to advance their disruptive innovation initiatives. They are doing so on their own, e.g., Samsung, Swisscom, or in partnership with independent accelerators, e.g., Disney, Microsoft, and Barclays have partnered with Techstars. The terms “incubator” and “accelerator” are frequently used interchangeably to denote an organization that aims at helping very early stage startups, or even just teams in the process of considering the creation of a startup, get off the ground successfully. They do that typically in exchange for a small equity percentage in each startup. This blog addresses the role of corporate incubators and accelerators in disruptive innovation, rather than the general topic of startup incubation that has been covered extensively elsewhere. It presents:

Four different corporate incubation/acceleration models.

The steps necessary for establishing and maintaining one of these organizations.

A process to help corporations increase the value and success rate they derive from their incubation/acceleration initiatives.

Defining Incubators and Accelerators

Incubators and accelerators are organizations that are ideally suited for helping corporations identify and explore open-ended and ill-defined ideas that are associated with long-term timelines to ROI. I underlined “ideas” because incubators are excellent as one of the sources for innovative ideas (see also open innovation). In addition, corporate accelerators are organizations through which to create solution prototypes and mockups, as well as for recruiting entrepreneurs and training intrapreneurs. The incubation/acceleration model, when done correctly and associated with long term innovation timelines to ROI, e.g., 7+ years, can have important impact to disruptive innovation. But corporate incubators and accelerators must also work in collaboration with other corporate innovation-enabling groups.

Corporate incubators and accelerators provide entrepreneurs with training (typically in Lean Startup methods, and the Innovation Process), idea prototyping, mentorship particularly during the development phase (including specific vertical industry expertise), partner networks (including VCs) and facilities. They typically follow a particular process of accepting teams, training them, helping them ideate and prototype, and develop their prototyped ideas. Figure 1 shows the ideal structure and high level process of a corporate incubator and accelerator.

Figure 1: The ideal structure and high-level process of a corporate incubator and accelerator

However, the two models different in two important ways. First, accelerators invest in their startups, typically $20-100K in each company, whereas incubators don’t. Second, accelerators support startups in groups, also referred to as cohorts, and classes, whereas incubators do so on-demand. A corporation can start with a startup incubation model and progress to an acceleration model.

Only a few of the corporations that have created, or are working with, incubators and accelerators realize the true utility of these organizations in the set of options for generating innovations. Most of them don’t yet. Corporations expecting incubators/accelerators to provide them with working solutions that can be transferred directly to their business units will be disappointed by the results. Corporations that need working solutions are better off working with their venture group to identify them and invest in them. For example, GE Capital invested in Mocana that has developed a mobile application security platform that is well suited for the Internet of Things, Intel Capital invested in Cloudera for its big data infrastructure software, and Visa invested in Square for its mobile payments platform.

Many corporate incubators and accelerators are established in Silicon Valley, but not all. For example, Pitney Bowes established an incubator in India whereas Allianz established theirs in Munich, and Bayer in Berlin.

Corporate Incubator and Accelerator Models

Corporations use different incubation/acceleration models as they are trying to achieve their objectives. We have identified the following four:

1. A step in the innovation process:

Model: The incubator/accelerator works with both intrapreneurs and entrepreneurs that propose disruptive solutions to existing problems, or work on potential disruptions that the company cannot otherwise pursue. The broad incubation lasts 4-18 months. The best teams are given the opportunity to continue developing their innovation by being: a) invited to join the corporation (spin in), b) fenced off for some additional period during which the corporation makes an additional investment to keep them going, c) asked to continue working outside the corporation (spin out) and are offered an investment either by corporation’s business units or its corporate VC arm (with or without additional investments from institutional VCs), or are left on their own to raise money from institutional VCs or other funding sources.

Examples: Samsung, Telefonica.

When to use the model: When the corporation a) wants access to early stage innovations, b) has developed a long term strategy for disruptive innovation with the appropriate timelines (need to be thinking 7-10 years out for realizing a return on this type of investment), c) has established the appropriate KPIs for measuring the performance of the incubation/acceleration effort, and d) is ready to commit resources to work closely with very early stage startup teams, see them through their ups and downs and tolerate their risk-taking and failures.

Benefits to the corporation: The corporation commits long term to disruptive innovation. It is able to attract entrepreneurs that can eventually join one of the business units. Its intrapreneurs get to work side by side with these entrepreneurs and learn from one another. The incubation/acceleration and the corporate venturing groups are able to collaborate around the incubated teams. The corporate incubator/accelerator enables the corporation to connect with the broader startup ecosystem.

2. Pay it forward:

Model: The corporate incubator works with outside teams of entrepreneurs offering them facilities and training. Most importantly it exposes exposing them to real industry and company problems, and making available experts to help them understand the issues. The corporation does not receive any equity in exchange for these services. The incubation lasts 6-12 months.

Examples: Allianz, Turner.

When to use the model: When the corporation wants to a) start exposing its executives to startup thinking and practices, b) attract entrepreneurial talent, and c) elicit new ideas and early stage innovations from outside its four walls on how to solve important problems.

Benefit to the corporation: Creates goodwill with entrepreneurs while accessing talent, ideas and potential solutions to problems of interest. In the process it exposes its executives to startup teams, processes and thinking.

3. Develop intrapreneurs:

Model: Teams of entrepreneurial employees use the incubator to create innovative solutions and test business models that cannot normally be pursued by the business units.

Examples: LinkedIn, Google, Starbucks.

When to use the model: When the corporation has a strong innovation culture and long-term commitment to disruptive innovation.

Benefit to corporation: Promote and strengthen intrapreneurship, risk-taking, and out of the box thinking. Rapidly develop new products and business models.

4. Test new work environments:

Model: The incubator becomes a place where the corporation creates and tests new work environments that are based on core startup characteristics: openness, rapid prototyping, experimentation, risk-taking, working with uncertainty, and collaboration over distributed environments.

Examples: ATT Foundry, Standard Chartered Bank (SC Studio).

When to use the model: When the corporation wants to test startup-like environments but is not prepared to take on the risks associated with external startup teams.

Benefit to the corporation: Experiment with startup approaches, organize and manage internal groups using startup company structures (flat management, open communication) in an effort to create high performance organizations.

Setting up a Corporate Accelerator

For any corporation, the learning curve for establishing and maintaining a successful startup incubator or accelerator is steep because it involves performing many tasks, several of which are new and “unnatural” to the corporation. Moreover, most of these tasks must be performed simultaneously. Setting up an incubator or an accelerator involves:

Selecting the right founder teams to incubate. This selection extends to the intrapreneurs as well. The right teams are characterized by their passion, ambition to solve a big problem and in the process create billion dollar businesses, intelligence, true willingness to learn, (including learning from their mistakes), and desire to takes risks that are not always fully aligned with corporate culture. Selecting the right teams also implies selecting the right projects to incubate. That often involves taking into account corporate priorities, as well as understanding how the efforts of the corporate venturing, corporate development and business development groups are trying to address these priorities. My suggestion is for corporations to focus on opportunities where they have a competitive advantage over any independent startup. For example, specific vertical industry expertise. A viable way for selecting candidate teams is through hackathons.

Mentoring the incubated teams on how to develop their idea into an initial prototype, helping them solve problems as they arise, rapidly iterating through successive versions in an effort to find the right product/market fit.

Establishing the right culture across the teams being incubated but also helping each founding team forge the culture of the company it is creating. For intrapreneurs this implies establishing a culture that is very different from the corporation’s existing culture. This in itself may make difficult, if not impossible, for each incubated team of intrapreneurs to re-enter the company.

Pruning out the startups that cannot translate their idea into a product, cannot find the right market fit for their product, and those that have team issues. It is well accepted that 9 in 10 startups fail. While incubation and acceleration aim at improving the startup failure rate, they do not eliminate it.

Exiting the successful companies either as independent, self-sustaining entities that are able to attract new capital, or by spinning them in to a new or an existing business unit.

Increasing the Value Derived from Corporate Accelerator

Because of our experience in dealing with startups in general and many of the issues above in particular, corporations are starting to collaborate with VCs on how to best set up their incubation/acceleration efforts in way that will make them successful. Let me now propose a process that can help corporations increase the value and success rate they derive from their startup incubation and acceleration efforts:

Determine whether you need an incubator or an accelerator, select which of the four models you will employ, (you may even decide to use a model that is a hybrid of the four presented above).

Decide whether to establish an independent incubator or create one in partnership with a third-party, e.g., Techstars. Incubators/accelerators created in partnership with third parties allow for faster time to market but can be expensive propositions and may ultimately limit the amount of knowledge transfer that will enable the corporation to ultimately run its own incubator. Once the corporation decides to establish its own incubator or accelerator it must try to remain consistent to its goal and model in order to develop credibility with entrepreneurs. Decisions such as Vodafone’s which recently closed down its Silicon Valley incubator don’t help. Telefonica, on the other hand, opened several of its Wayra incubators after the initial launch.

Master the steps of maintaining a successful corporate incubator/accelerator, described above.

Obtain and maintain executive sponsorship and funding, preferably from the CEO.

Set up dedicated funding for the accelerator and ensure that it will not be connected to the annual corporate budgeting cycle. First, setting up a corporate incubator/accelerator requires a significant monetary and people investment. The high cost comes from identifying, recruiting and retaining the right people to staff the incubator/accelerator. Working with a third-party incubator, like Techstars, could alleviate some of these costs but the corporate investment remains high. Second, seed-stage investments to the incubated teams should not be treated as though they were just another investment in the annual budgeting cycle that is subject to the same rules and rigor as an investment in an existing product.

Recruit the right mentors. Create a network of mentors that includes both corporate employees, including executives, and outsiders with startup experience. These mentors are not just helpful to the entrepreneurs, but can provide invaluable advice even the business leaders within the core business. Evaluate the mentors as rigorously as the incubated teams, keep the ones that are being effective and replace the others. Work hard to keep the ones that are effective, particularly the corporate executives.

Introduce business unit employees into successfully incubated projects in order to prepare the business unit for taking ownership of the solution being created.

Provide the right incentives for the entrepreneurs, including the intrapreneurs, with the best of the incubated companies so that they will continue their effort after the acceleration phase and allow the corporation to achieve maximum benefit.

Embed the incubator/accelerator in the ecosystem it is operating in, e.g., Silicon Valley, rather than simply locating it there. This means that the incubator’s leadership must network extensively in the ecosystem. Startup teams must be able to learn from their peers, identify and recruit talent from local networks, and quickly experiment with and embrace or discard new processes and tools as they become available in the ecosystem.

Create simple contracts that define the relationship between the startup and the incubator/accelerator. This is even more important when an accelerator model is used since that model involves the corporation making an investment and taking an equity position in the startup.

The current corporate incubator/accelerator movement is very real; and like other corporate initiatives, can show meaningful results if done properly. There is no single recipe or “best practice” for setting up an incubator or an accelerator. The type of organization the corporation establishes and the model it chooses depend on the corporation’s unique objectives, capabilities, time line and competitive threats/opportunities. The best corporate incubators accelerate corporate insight and corporate learning on a broad scale. Learning faster than the competition is perhaps the only remaining true method of sustained competitive advantage.

Evangelos Simoudis is a Sr. Managing Director of Trident Capital, a #VC and #PE firm he joined in 2005. Evangelos focuses his institutional and private investments on Internet (#adtech and #ecommerce), #SaaS #applications and #bigdata #analytics companies. Before Trident, Evangelos spent 5 years as a partner at Apax Partners, a #PE firm where he invested and served on the boards of early and growth IT companies. As he did at Apax, at Trident Evangelos leads the firm's SaaS and Internet advisory boards.